The Indian equity markets

One aspect of India's much publicised growth story that has attracted tremendous interest has been the booming stock market. With advances in technology that have facilitated ease of market trading, the number of domestic investors in the retail segmenti has increased exponentially over the past decade. This has also fuelled a plethora of brokerage houses and financial newspapers offering equity research recommendations.

While there has been lot of study done in the US and European markets to understand how the recommendations of equity analysts have performed, we were not able to find any research paper pertaining to the Indian equity markets. Hence the focus of our study is to study how the recommendations made on Indian equities fared in the long term. Semi-strong form of market efficiency clearly states that stock prices rapidly adjust to publicly available information so no abnormal returns can be generated over the long run.

Most prior studies indicate that analyst reports promotes market efficiency by disseminating information to investors which they wouldn't be privy of, due to lack of access and effort required. Analysts gather information and then systematically research on different stocks in order to ascertain if current market price of the stock is overpriced or underpriced with respect to the intrinsic fair value of the company to arrive at their recommendations. We have considered here the one year horizon recommendations which is the most common time frame used.

This study should be of interest to both investors and the analyst research houses. From investor perspective, given the fact that there are many paid subscriptions to brokerage research houses, it will help them understand if their investments based on recommendations generate real value over time. Also by dissecting the type of stocks the analysts choose for making recommendations, we try to identify the inherent biases, which can be removed to aid in making better recommendations in terms of improved predictive returns. The period of study is 2007-2009.

The reason for choosing this period is because it captures the crest and trough of the economic cycle. 2007 was a boom year with stock market riding new highs. It was followed by the slump in later half of 2008 which battered the markets. Finally the recovery phase from second half of 2009 post the monetary stimulus actions by federal banks around the world. The year 2007 was characterised by a large number of recommendations, especially 'Buy' ones. With market climbing to new levels, most of the recommendations were in tune with the forward momentum. 2008 saw a sharp decline in the recommendations.

Retail investors stayed away from the market. The market itself was reigned by confusion and mayhem. There were huge swings of volatility day to day and no analyst was willing to make a bet on the market. 2009 again saw a positive increase in recommendations. Most of the equities were trading at their all time lows offering opportunities for bargain buying. The key was to identify the right stocks which would recover quickly out of the crisis. Business Line however has been consistent in the number of recommendations. It has been steadily increasing year on year.